February 4, 2023

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ECB to firm up plans to ward off bond market stress

2 min read

The European Central Bank is this week set to strengthen its commitment to prop up vulnerable eurozone countries’ debt markets if they are hit by a sell-off, as policymakers prepare to raise rates for the first time in more than a decade.

The bulk of the 25 governing council members are expected to support a proposal to create a new bond-buying programme if needed to counter borrowing costs for member states, such as Italy, spiralling out of control, according to several people involved in the discussions.

Even without a new scheme, the ECB already has an additional €200bn to spend on purchasing stressed government debt under its existing bond-buying programme. That €200bn would come from bringing forward reinvestments of maturing assets by up to a year.

Rate-setters, who meet in Amsterdam on Wednesday and Thursday, are likely to clash over when to stop buying more bonds. Some plan to call for purchases to be halted as soon as Thursday, several weeks ahead of schedule, although they concede that only a minority may support the idea.

The bank is under pressure to react to record-high inflation, but has lagged behind its counterparts in the US and UK in tightening monetary policy. Many of the council’s hawks have accepted that they will need to provide more support for bond markets to clear the way for being more aggressive in raising rates.

Almost all of the council accept that the ultra-loose monetary policy it has pursued for over a decade needs to end. A rise of at least 25 basis points is all but certain to happen at the ECB’s next policy meeting on July 21. The deposit rate is now minus 0.5 per cent.

Citizens in the region are facing a surge in the cost of living, aggravated by Russia’s invasion of Ukraine. Consumer prices in the eurozone rose 8.1 per cent in the year to May — quadruple the ECB’s 2 per cent target and double the previous high since the single currency was launched in 1999 — forcing governments to pay subsidies to…

2022-06-06 00:00:41

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